Confidence Men Part 11

Though these were not Summers's strong suits, he was now in charge of a crucial morning slot on the president's schedule each day-at least for a few weeks or, at most, a few months. That's what Emanuel antic.i.p.ated. Rather than a session to hammer out policy, these daily economic briefings, he felt, were as much as anything for show-a statement of hourly purpose about the president's central commitment to battling the economic crisis. They'd be phased out, Rahm figured, in a month or so.

But Emanuel showed up, along with almost everyone with a senior role in domestic policy-at that point, almost entirely about the economy slide and financial collapse. Geithner, Orszag, and Romer all attended, along with Joe Biden's economic policy chief, the progressive economist Jared Bernstein. Axelrod usually attended as well, as did the vice president.

Of course, the meetings were run by Summers, who set the agenda and worked up briefing materials for the president to read, which the latter often did late the night before, after the girls were tucked in.

And the president did his homework. Compared to the economic meetings during the transition, where he took notes and asked the infrequent question, Obama, now as president, was quite engaged. He was ready to own the key concepts and debate them, in the aim of arriving at what he called "best possible plans."

He ran into a united front, philosophically, of Summers and Geithner. Both men viewed the U.S. economy as a sick patient, but one with strong, and often improbable, recuperative powers. One of Summers's favorite phrases-often echoed by Geithner-was that, as policy makers, they should rely on Hippocrates' dictum "first, do no harm."

By early February it was clear that what the president hoped would be a debate society, organized by Summers but presided over-like a judge in a moot court compet.i.tion-by Obama himself, was turning into Larry Summers's economics seminar.

The meetings often seemed impromptu, with the tenor of a free-form search for solutions, but Summers, knowing the well-worn steps of dozens of economic debates, seemed to guide discussion toward some waiting item on his syllabus. The NSC-style process of debating concepts through deputies and princ.i.p.als to arrive at some distillation of choices for a presidential decision, was, in essence, being done in Larry Summers's head.

This cribbing of Hippocrates was a formidable rhetorical stance and subtly difficult to refute. Virtually any action on a grand scale would carry unintended consequences, and maybe even intended ones, that would create damage to the short-term interests of some const.i.tuency. Meandering discussions about whether the intended consequences would outrun the unintended ones would quickly slip into theoretical guesswork, while underselling the variable of how strong execution or persuasion-or, more succinctly, leaders.h.i.+p-could help push proposals to surprisingly strong outcomes.

Obama's response to this cul-de-sac: outside readings. Rather than "first, do no harm," by the first week in February his preferred phrase was "Sweden not j.a.pan."

Though neither country's experience is cleanly applicable to that of the United States, by far the world's largest economy, the experience of each country seemed to present a set of choices.

Sweden had deregulated its financial industry in the early 1980s, much like the United States, creating a bonanza of speculation in new securities tied to housing, and inflating a ma.s.sive real estate bubble that finally burst in 1991. In circ.u.mstances that were eerily similar to those in the United States, credit then froze in an economy that was heavily overleveraged with debt. Values plummeted, from both a crisis of liquidity and a ma.s.sive correction in inflated prices.

After two rounds of bank bailouts, which seemed at first to be working only to prove inadequate, Sweden temporarily nationalized its banks. Shareholders were wiped out, management teams were generally ousted, troubled a.s.sets were auctioned off, and the banks reemerged with the government as a large equity owner. Crucially, though, confidence in the system was quickly restored. Sweden, with this tough-love approach, roared back to strong growth throughout the decade. The government reduced its owners.h.i.+p in the banks, year by year, as they slowly returned to health and sound practices. In essence, Sweden restored its banks by a kind of enforced prudence.

At the same time, half a world away, j.a.pan was experiencing a similar set of disasters from the bursting of its 1980s real estate bubble. The major difference? What Sweden had started-and then reversed-j.a.pan kept doing: it kept bailing out its insolvent banks with government support and cash infusions. There were ups and downs across years, times when the banks seemed to be on the mend, and then fell back. The idea was for the banking system to stay intact and earn its way back to health by slowly reducing its toxic a.s.sets as it resumed lending. This never happened. j.a.pan limped along for what was called its "lost decade," the 1990s, with virtually no economic growth, a situation of sluggish economic activity that continues up until the present day.

New York Times columnist Paul Krugman had been developing both edges of the a.n.a.logy since a few weeks after the September 2008 meltdown, when he wrote on his widely read blog that a temporary nationalization of the banks, as the Swedes had successfully done, was the only sound remedy to the crisis, but one that "won't be possible until January 21"-when, he hoped, Obama would be president.

Just as Obama was firmly opening a mid-October lead that would all but a.s.sure him the presidency, Krugman also won a prize, the n.o.bel Prize for Economics, which gilded the columnist with a rarified credibility ideally suited to the moment. While Krugman's longtime compet.i.tor, Summers, a.s.sumed the role of senior economic adviser, Krugman was suddenly the voice, twice weekly, of the progressive alternative. While in Stockholm in mid-December to accept the prize, Krugman warned that the "scenario I fear is that we'll see, for the whole world, an equivalent of j.a.pan's lost decade, the 1990s-that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," a bleak outcome that might result if the United States followed j.a.pan's path of largely unconditional support for "too big to fail" banks.

"Each morning at the economic briefing it was like we were debating Krugman," said one attendee of the meetings. "Clearly Obama was reading Paul's columns and related materials on this Sweden-versus-j.a.pan split, and it made sense to him as both a.n.a.lysis and a guide for action."

All of which put Summers and Geithner-both of whom thought the country comparisons were overly facile and of limited application-in a bind. This was especially the case for Geithner, who was busy working through alternatives for a plan, any plan, to fix the financial system, a plan Obama was anxious to unveil.

It wasn't going to look much like Sweden. He and his thinly staffed Treasury considered one plan after another, including guaranteeing the a.s.sets of the banking system against extreme losses-a proposal whose price tag could approach $1 trillion-or forming an "aggregator bank" that would start buying toxic a.s.sets from banks with a large portion of the $350 billion currently left in TARP. The problem: Treasury officials estimated there may be as much as $2 trillion in toxic a.s.sets throughout the system. No one had that kind of money.

The remedies were all a.s.set-based. How, in short, to remove or nullify enough of the toxic a.s.sets on bank balance sheets-most of them securities tied to or backed by mortgages, many quite complex-so banks could begin to lend again, but do it in a way that didn't seem like another ma.s.sive government grant to help them earn their way out of a disaster they'd largely caused.

With only a few days before Obama was due to offer news of Geithner's solution at his first presidential press conference, Geithner's team-at that point, pulling all-nighters-settled on a program the Fed had developed the previous fall: a public-private buyout fund. Investors' capital would be leveraged up at about ten to one with loans from the government, which would act as a co-investor. If there were profits, the investors would do well; if not, their losses would be limited, but their involvement in what was clearly a sweet deal would help move the toxic fare out of banks and into a marketplace where it could be priced. At least, that was the idea.

When Obama stepped into the East Room on the evening of February 9, he was carrying the surety of a man fast establis.h.i.+ng his bearings. With approval ratings in some polls notched above 70 percent-CNN's was a 76-he could now offer a display of strength in an area of weakness for his predecessor: the prime-time presidential press conference. Viewers.h.i.+p was high, a 42 household rating. Just three weeks after the historic events on the Mall, people wanted to see the man they'd elected in action, and the live theater of thrust and parry with the Was.h.i.+ngton press corps is as close as the public tends to get. Obama was pumped up and ready. He'd been training for this for much of his adult life and, stepping to the lectern, he was br.i.m.m.i.n.g with explanations for how the world worked and what he was planning to do about it. For the first question-about whether his rhetoric about the economy was too bleak-he went with j.a.pan: "The federal government is the only ent.i.ty left with the resources to jolt our economy back to life," he said, alluding to the soon-to-be-pa.s.sed stimulus, and then warned that a failure to act "boldly and swiftly" in handling the failed banks could leave America looking like j.a.pan. "They suffered what was called the 'lost decade,' where essentially for the entire nineties, they did not see any significant economic growth."

As to the specifics of those bold and swift actions-crucial to avoid j.a.pan's fate-he said the country would be hearing the next morning from his right-hand man.

"Tomorrow, my Treasury secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again. And that means having some transparency and oversight in the system. It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward. It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they're not necessary. It means that we focus on housing and how we are going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline."

Obama was just warming up, mentioning a moment later how "my immediate task is making sure that the second half of that money, $350 billion, is spent properly. That's my first job. Before I even think about what else I've got to do, my first task is to make sure that my secretary of the Treasury, Tim Geithner, working with Larry Summers, my national economic adviser, and others, are coming up with the best possible plan to use this money wisely."

The president had not actually done that, at least not yet. There'd been discussions in the morning briefings about guiding principles and the president's view about how policy should be shaped-views that Obama expressed eloquently, several times, across the coming hour.

Principles, however, were not policies, and well along in the questioning, the New York Times' Helene Cooper, who understood Obama better than most other reporters in the corps, pressed for specifics: "On the next bank bailout, are you going to impose a requirement that the financial inst.i.tutions use this money to loosen up credit and make new lending? And if not, how do you make the case to the American people that this bailout will work when the last one didn't?"

The question was a bull's-eye. Obama, for the umpteenth time across an hour, deferred to his Treasury secretary, who, of course, didn't believe in imposing requirements on how financial inst.i.tutions decide to apply their capital. "Again, Helene, I'm trying to avoid preempting my secretary of the Treasury. I want all of you to show up at his press conference as well," Obama said to hearty laughter. "He's going to be terrific."

The next morning, a standing-room-only crowd gathered in the high-ceilinged Cash Room at Treasury. Geithner was anything but terrific. The plan for government to encourage investors to buy up toxic a.s.sets-a program that would eventually be called PPIP, for Public-Private Investment Program-was offered only in generalities. It was so hastily a.s.sembled that Geithner's team hadn't worked out the crucial logistics, such as how the a.s.sets would be valued, using what yardsticks, or what terms would apply to investors. There were rumors that Geithner would address the fundamental issues on the sellers' side of this equation-whether banks would get a reprieve in "mark-to-market" accounting for the a.s.sets they sold to the new fund. Without that, banks would have to take huge write-downs from such a.s.set sales-forcing them to book heavy losses or even publicly acknowledge their insolvency. No remedy for that meant the public-private partners.h.i.+ps could be a bust.

Geithner offered nothing on that score-no clear policy, after all, had been hashed out-though he did mention, almost in pa.s.sing, a program for "stress-testing" the banks over the coming months, to show their soundness. But he was hard to listen to. He was sleep-deprived and nervous as h.e.l.l, and it showed. His demeanor seemed s.h.i.+fty and small. MSNBC's Mike Barnicle memorably described him as having the "eyes of a shoplifter," darting fearfully to and fro.

As laudatory reviews of Obama's fortnight's performance filled the news cycles, a wide and diverse audience now saw Geithner and winced. Minutes after he stepped before two huge American flags, looking like the losing candidate in a student council election, the equity markets began to tank. It didn't stop. The confidence Obama seemed to impel was shattered by the man he'd hired. By 4:00 p.m. the Dow had dropped a stunning 378 points. Geithner was widely cited as the cause.

This dissonance was the first glimpse of a gap between sunlight and shadow, between what the public saw and felt about the president-about his incisive intellect and unflappable demeanor, his command of issues and events, his charm and perspicacity-and what was happening inside the protected realm of the White House.

The next morning, and the ones that followed in the coming weeks, the president would work his j.a.pan-versus-Sweden a.n.a.logy, as Geithner would parry this line of argument with his gentle verbal quickstep, offering qualifiers about how Sweden was different from America, and j.a.pan was, too. There were many distinctions. Sweden had only six large banks. j.a.pan had structural issues that were unique to its economy.

Meanwhile, Summers backed off, steering clear of offering his own definitive position. The issue of whether to take down banks and restructure them was, after all, primarily the province of the Treasury secretary. Summers knew this: he once had that job, had wanted it again, was pa.s.sed over in favor of his young friend, and now was waiting patiently for the prized job as Federal Reserve chairman when Bernanke's term came up later in the year. Other than offering general comments about the effects of tighter credit on the wider economy, he gave ground, letting the embattled Geithner stand in the way of Obama's evolving position and ardor.

The president, Summers could see, was trying to establish enough mastery of some very complex issues so that he could act boldly and swiftly and, it was hoped, responsibly, on behalf of the American people.

Summers knew it was better in any debate to let one's opponent fully establish his position before you stepped up to the lectern. In others words, he who goes last usually has an advantage and, eventually, the last word.

Obama, now as president, was busy going first, trying to figure out a way to be Roosevelt in the country's hour of need.

9.

Well Managed.

The black sedan was speeding back from Capitol Hill, down Pennsylvania Avenue and toward the White House. Tim Geithner, fresh from testifying before the House Budget Committee, was on the phone, and had been on call over the past few days. Citigroup, the largest diversified financial inst.i.tution in the United States, was on the verge of collapse. The previous afternoon, in a heated conference call with Ben Bernanke and the other top financial officials in the United States, Sheila Bair, head of the FDIC, was pressing Geithner to "bite the bullet" and, with the FDIC's help, do an orderly "resolution"-essentially, a controlled bankruptcy. Geithner fended her off, and then called d.i.c.k Parsons, the former Time Warner chief who was Citi's new chairman-replacing Bob Rubin-to report where things stood. Since then, the situation had continued to deteriorate.

Just that morning, March 5, Citi's stock had dropped below $1 per share-less than the bank's charge for a single ATM transaction. The bank, which had a stock price in the high $40 range in 2007, was now facing an upside-down balance sheet, with hundreds of billions in toxic a.s.sets and a market capitalization that was racing toward zero.

If Citi collapsed in an unmanageable "run," other banks would likely follow. It could easily be a Lehman repeat, plunging the economy even deeper into trouble. But it was also a test. The government could either add more capital, bailing out another troubled Wall Street giant, or it could show its ability to soundly unwind a big bank without sending the financial world into spasms. What was clear was that the government couldn't stand by and do nothing.

In the car, Geithner looked at that morning's news. Late that afternoon, there'd be another conference call. Bair would be coming at him again.

Sitting next to Geithner in the car was one of his top deputies, Alan Krueger, now the a.s.sistant Treasury secretary for economic policy and-in a term dating back to the eighteenth century-the "chief economist of the United States." Another holder of that t.i.tle was Paul Volcker, when he had this job in 1969.

"You've got to fill in for me," the Treasury secretary told Krueger as their sedan pulled onto the White House grounds. "I'll just make a quick appearance, show everyone I was there, and then slip out. I don't have time for this today."

Geithner was talking about the big Health Care Summit taking place at midday in the White House. The secretary, in other words, didn't have time for what his boss considered the most important initiative of his presidency.

A hundred yards away, at the Northwest Gate, John Podesta was pleading with White House security. He was certain his name was on the list.

Sitting in his booth, the guard glanced over again at his computer screen. Sorry, no "Podesta" had been cleared. The former Clinton chief of staff shook his head in disbelief. He had once ruled these grounds. He began dialing numbers on his BlackBerry, one White House extension after the next, looking for someone, anyone, to get him clearance. No answers.

Almost everyone of political consequence was already crowding beneath the gold-inlaid ceiling of the East Room. This morning was the grand opening of Obama's adventure in self-governance: the mission to reform health care in America, a goal that had eluded nearly every president since Teddy Roosevelt. Today it was a combination of theater and intervention, with the new president a.s.suming the role of therapist in chief, bent on saving a town addicted to conflict.

The crowd in the East Room was buzzing with antic.i.p.ation and nervous energy, like a feuding, far-flung family gathered at a rare reunion. Since word of this leaked out two weeks ago, the issue of who was and wasn't on the guest list had become the stuff of controversy. Representative John Conyers, Detroit's aging liberal African American dean, went so far as to squeeze Obama's arm at an event and ask to be included-to no avail-touching off a flurry of online outrage that finally resulted in an invite.

On the day's schedule was a short speech by Obama, followed by an hour where everyone would break into work groups, and then a return to the East Room to begin sketching a way forward. In his Inaugural Address, Obama had said that in the election, America had chosen "hope over fear," but already the town's mandarins were whispering that he would need both of those important tools to squeeze anything like tangible progress from this rabble.

No one knew this better than Podesta, who-having finally found someone to vouch for him with the guards-slipped quietly into a chair in the last row. He had worked in the White House during the last great battle to change a broken health care system. The Clinton crew, many now settling into roles in the current White House, tended to look back on those days a bit like General Pickett reflecting on his disastrous charge at Gettysburg.

It was a slaughter. President Clinton had called together "the finest minds" and, under the guidance of the First Lady and Ira Magaziner, a Rhodes Scholar buddy, they produced a thousand-page opus on how to repair what was even then 11 percent of the U.S. economy. They had unveiled the plan with great fanfare, flags waving, brilliant men and women in a.n.a.lytical concert marching to Capitol Hill for its pa.s.sage. The doctors and hospitals, insurers and drug companies, who were not included in the deliberations, waited for their moment and then, in unison, opened fire. It was a bloodbath. Health care reform, having sucked up all the town's oxygen for nearly a year, collapsed instantly in a heap. The fledgling president seemed overmatched and confused, and the Democrats were sh.e.l.lacked in the '94 midterms.

Fifteen years later, Podesta tried to think about what was different this time and what was different between the two presidents. Carrying lessons from one era to another, Podesta said, was not simple math. It was more like calculus, with s.h.i.+fting variables. The key was to draw the right conclusions.

In the early nineties, he said, "there was a real debate about the need for reform, but not anymore." Pursuing the thought, he added, "That's the fundamental change. The business community now comes to the discussion with a real urgency. They're getting killed with what's going on in respect to health inflation. It's imperative that the system change. Everyone agrees on that."

But Podesta's vantage point yielded insight into the most important variable, the central actor: the two-term president he had known intimately, as only a chief of staff can, and the new president, whom he had now seen in more executive actions, as head of Obama's transition, than almost anyone, anywhere.

"Clinton had-or rather has-an ability to synthesize competing positions, to command the room and arrive at ingenious versions of the middle ground, that's often invisible to others," Podesta said. Obama was different, though, and it took him a minute to pa.r.s.e just how, in a way that praised both men equally. "He draws people out of their comfort zone," he said, "but he does it subtly, challenging them with his openness and his commitment to change. He ends up making them rise to the occasion. He doesn't just synthesize and sell a solution. He finds opportunities in the larger body of players to create circ.u.mstances where change can happen." He paused, thinking all this over, and then he got it to a single sentence: "He's creating a s.p.a.ce where solutions can happen."

Or so it might have seemed. It was clear to those inside Obama's inner circle that the new president was trying to find ways to harness the energy that his stunning election and glowing presence had created. He certainly hadn't been bashful so far, answering the high hopes of his election with an audacious breath of early initiatives. Over the objections of his key advisers, Obama had decided to use his historically strong opening hand to bet on health care reform rather than to focus, night and day, on the disastrous nexus of a collapsed financial system and a sinking economy.

Still, they were all anxious to see how Obama used his vast political capital in a moment he had created: calling this White House summit to push forward his signature initiative. Several advisers were recommending toughness, saying that he needed to scare some sense into these health care stakeholders. They argued that fear was all that they, or anyone in Was.h.i.+ngton, respected.

Obama went with hope instead. His opening speech laid out the problems: medical costs rising at four times the rate of inflation, crus.h.i.+ng kitchen-table budgets, tenuous business balance sheets, and leaving forty-six million uninsured. Then he told those gathered-fifty-five members of Congress, eighty-two representatives of the health care interests-that things were this way because over the years "people in this room failed to act."

As the speech ended, Geithner turned impatiently to Alan Krueger. "I need to leave," he told him, and slipped out a side door.

The a.s.sembled then broke into discussion groups led by top officials in the administration. Krueger, in Geithner's stead, ran a breakout group with Nancy-Ann DeParle, the White House's new chief official on health care reform, and then made his way back to the main room, where the larger group was reconvening. Orrin Hatch, the conservative senior senator from Utah, grabbed Krueger's arm.

"Tell your boss, Geithner, he shouldn't be coming to things like this," the senator said. "Someone needs to be working full time on the job of saving the economy."

Clearly the president wasn't. Now, with the precious opportunity of having brought official Was.h.i.+ngton together for the day in his house, the people's house, Obama spent the next hour conducting a kind of afternoon talk show.

He offered a few pa.s.sionate remarks about reform, read the highlights of what some people had said in their breakout sessions, and then answered a few questions from the audience. There were some special guests who needed to be cited. Key lobbyists were asked to stand and affirm their commitment to reform. They did, one by one-the lead lobbyist for the hospitals, for the doctors, for the nurses. Then the room quieted.

"Is Karen Ignagni here?" Obama said. "Someone get her a mic."

A smallish women with a blond pageboy stood up. Everyone in the room knew that she and her organization-America's Health Insurance Plans, or AHIP-were the dangerous wild card in the mix. Ignagni, once the head lobbyist for the AFL-CIO and now president and CEO of AHIP, had broken with the hospitals, doctors, drug companies, and other stakeholders in 2007, saying the insurers would agree to reform in exchange for a federally supported individual mandate. Such a mandate would force people to get health insurance, in the same way they needed auto insurance to drive a car. Health insurers-with $12 billion in annual revenues, a modest-size lynchpin in a $2.5 trillion health care industry-had suddenly seemed willing to trade plenty to get forty-six million new customers.

And that was before the election. The fear rippling through the room today was about what health care professionals quietly called the "divide-and-conquer strategy." If the new president could turn Ignagni's grand bargain into a grand alliance and, by some combination of fear or bribery, turn the health insurers into more of a federally directed industry, the administration could use the insurers' key informational advantage of knowing every dollar spent and its value to drive down costs across the medical landscape.

Ignagni now clutched the microphone. "We hear the American people about what's not working," she said. "We've taken that very seriously. You have our commitment to play, to contribute, and to help pa.s.s health care reform this year."

Obama raised his hands, cueing the audience. "Thank you, Karen," he said. "That's good news. That's America's Health Insurance Plans!" Then he led the crowd in l.u.s.ty applause.

For his finale, Obama took the theater of goodwill up one more notch, strolling into the hallway behind the East Room and emerging with a hobbled Ted Kennedy on his arm. Kennedy, Obama's early patron and an advocate of health care reform for nearly forty years, was diminished, dying of cancer. But he said he was "looking forward to being a foot soldier in the battle."

The crowd broke into applause with renewed vigor and rose to its feet, with Obama acting as the narrator of this partic.i.p.atory moment he himself had invented. It was what he did at countless campaign rallies. It was what he did best.

But many in the crowd were beginning to wonder, now six weeks into the Obama presidency, how he would direct his inspirational talents in the act of governance. Obama had tried to lift and engage them today, to level with them, as though he were still a candidate and they were still voters, simply citizens on the receiving end of the U.S. health care system. He had tried to talk to them, in short, as human beings.

Of course, these were lobbyists-many of them compensated quite handsomely not to react as human beings. They were paid to act based on the interests they represented. Filing out, many of them wondered about the point of this big-tent revival, and why Obama hadn't unleashed invective on them, which was clearly what the voters wanted him to do. As they pondered this, they also wondered if there was something in the way Obama and Ignagni had been smiling at each other during their exchange. Had the two already cut some sort of secret deal?

Some of Obama's advisers were puzzled as well.

"Look, it's like the president said, you've got to be hopeful and you've got to include Republicans. You've got to include everyone and take them seriously," Zeke Emanuel, Rahm's older brother and a longtime health care expert, said. He'd been brought on in January to help guide reform and was pus.h.i.+ng through the White House's front foyer as he spoke. "The system is dysfunctional. The system isn't working. We need to head in the right direction. Are there different ways of getting there? Absolutely. Do we need to be pragmatic? Yes. I thought the president was pretty clear . . . I mean just look at Orszag's numbers-his cost projections on Medicare and Medicaid. We have no choice!"

If Emanuel sounded like he was talking in circles, it was because he knew something only a few others in the room realized: the White House had secretly shelved the best weapons it had for instilling productive fear in this group.

Though the president had made up his mind in the meeting where he channeled Daschle, and decided to include a $650 billion placeholder in the federal budget for health care, his top advisers subsequently wrestled back significant leverage and lat.i.tude. In small group meetings throughout February, Obama's senior staff had "modeled" the health care initiative off of a variety of pregame a.s.sumptions. The conclusions, by Rahm Emanuel and others, were that the "public option"-a basic government-sponsored plan that the insurers feared-was a nonstarter, as were significant cuts in medical costs. Peter Orszag, who had been pus.h.i.+ng the idea that cost savings should drive the expansion in coverage, was opposed in meetings by Rahm Emanuel, who thought Obama shouldn't even attempt health care reform at a time of economic crisis, much less take on the doctors, hospitals, and drug companies about rising costs. A more ambitious game plan, based on flipping and using the insurers, would demand a kind of strategic sophistication that the White House was already having trouble mustering.

Just a month and a half into his presidency, Barack Obama's White House was slipping into a kind of dysfunction. In a way, it was not all that surprising that a president who had never managed anything beyond his own personal journey had responded to wild expectations, at a time of crisis, by grabbing hold of every intractable dilemma in sight. But the improvisational ebullience, and energy, Obama mustered in the first few weeks wasn't being turned into concrete actions or strategies. As the president tried to rise to the demands of his job, the White House was increasingly being directed by a back-channel union between two forceful men: Rahm Emanuel and Larry Summers.

By March they had each begun to establish control of the two main sides to any presidency: policy and politics. Summers, fortifying his position as policy gatekeeper for all things economic, had become something of a domestic policy czar. He attended the important policy meetings and frequently talked to the president in private, framing the intellectual parameters on an array of complex issues. On the other side was Emanuel, who decided what agenda items were politically feasible and constructed the tactical plans for their execution. Emanuel had never been known for his long-range, strategic sensibilities. He was rather a man of decisiveness-or, depending on how you saw it, impulsiveness-and action.

But as important as what either man said directly to the president was what each said to the other. The two met often and talked after meetings with the president or the economic team, with Summers wandering down the hall to the chief of staff's office. Normally, Emanuel was wary of what he disparaged as the "pink-sheeters"-what he called people who, he quipped, read the Financial Times and pa.s.sed time at places such as the Aspen Inst.i.tute. Summers, with his rhetorical gifts, knew how not to come across that way. He talked tough. He talked politics.

"Larry fancies himself very good at politics," said Christina Romer, "and he wanted to please Rahm. That created problems in terms of how things were decided."

Decided by Summers and Emanuel, with or without the president.

Rahm Emanuel didn't come to the Health Care Summit, but Larry Summers did. He ran one of the breakouts, in fact. As the summit ended, just after 3:00 p.m., he was standing on the gra.s.s in front of the White House tapping on his BlackBerry. His comments there revealed the subtle complexities of how he saw the world and framed arguments, with him often taking both sides and then deciding which he liked best.

"We've gone from a moment when we've never had a less social-science-oriented group," he said coyly, referring to the Bush administration, "to a moment when we've never had a more social-science-oriented group. So . . . we'll see what happens."

As the self-styled leader of this latter camp, Summers expanded on this line of thought, remarking that health care presented "some difficult-to-ponder judgments. You can look at nine different hospitals with some heart procedure, and you can see it's working twice as well in some of them as it is in others. You can see what 'best practice' is, and that should propel the market to separate the best providers-whose services will be in highest demand-from the worst. Of course, hospitals and doctors will resist this sort of accountability," he added. "That's why it's going to be pretty tough. The market is tough. It's going to be a difficult shakeout."

A moment later, though, he said he was unconvinced that even the most heavily vetted evidence on these issues, from places such as Dartmouth, would be adequate to drive action. Nonetheless, he felt that government's role should not go much beyond simply making sure such pertinent information was widely available to the public-that that would have to suffice.

"One of the challenges in our society is that the truth is kind of a disequalizer," Summers said. "One of the reasons that inequality has probably gone up in our society is that people are being treated closer to the way that they're supposed to be treated." The hard, disequalizing truth of the past forty years, of course, was that those unfettered free markets had become increasingly borderless-a global regimen that had generally proven profitable for a minority of already advantaged Americans and, on balance, brutal for the majority of the U.S. workforce. The world caught up after several decades of postWorld War II American economic hegemony, and the response of large U.S. firms, especially in the deregulated post-Reagan era, was to accept capital, in both investments and fresh debt, to fuel their operations overseas. A decade into the new century, office towers of trademark American companies on both coasts were facing outward, using the cheap labor and lax regulations across the world to make strong profits, which flowed to the top corporate officers at twice the rate of even the 1990s. Meanwhile, they turned their backs on much of what once pa.s.sed for the U.S. economy. Yes, shareholders were advantaged, but a full 60 percent of Americans held few or no securities, while the greatest beneficiaries of all were the "allocators" of capital in the financial services industry. In 2007, this sector accounted for a startling 41 percent of corporate profits, a feat achieved in large part by accelerating the steady inclination toward overseas investment and spreading elegantly packaged debt across the ever more burdened U.S. landscape. The notion that this is the way many Americans "are supposed to be treated" might be seen as a pretty harsh prescription.

But Summers's belief in the efficiency of markets was, and had long been, focused on the drive to get ever-more-precise and accurate information into the hands of what he still believed were mostly rational actors, and let them do what they would. He continued to view people as rational, even as the behavioral revolution launched by Daniel Kahneman and his partner, Amos Tversky, and last fall's economic meltdown showed how irrational and self-destructive people could be.

To help decipher Summers's comments-a snapshot of the complex brew he was, at this point, serving to the president-were two people within a stone's throw. One was Billy Tauzin, a lobbyist of similar stature and craftiness to Ignagni. A long-serving Louisiana representative who switched from Democrat to Republican in the 1990s, Tauzin had pushed through one of the most expensive pieces of legislation in American history: the Medicare Prescription Drug Improvement and Modernization Act of 2003. Costing $500 billion over ten years, it is considered by many to be a ma.s.sive handout to the pharma industry, which in return hired Tauzin as their lead Was.h.i.+ngton representative.

Tauzin, tellingly, was now in concert with Summers. As he walked from the White House to his waiting car, he averred that the drug companies were all for evidence-based medicine, but that the data should be simply a guide, offered up for the marketplace to handle as it pleased. Even the substantial evidence already available, of course, had had little effect on medical practice. Nonetheless, Tauzin, like Summers, had great faith in the market-or at least professed to-and little faith in government acting as an arbiter. On that score he had a new fine-feathered arrow in his quiver: in the past few years he had survived intestinal cancer.

"Listen here," he said. "There are 226 cancer drugs that are not accepted in the UK-based on the 'evidence-based' decisions of their government-run health plan-and one of them is the drug that saved my life. And if the government starts making life-and-death decisions based on a claim to perfect knowledge, then it's doing what G.o.d does," he said, laughing, and offering a glimpse of what would soon be the "death panels" attack. For both him and Summers, only the unfettered marketplace could stand in for G.o.d's judgments.

But there was no one in D.C. with more insight into Summers than Alan Krueger, who slipped outside right before the afternoon's dramatic high point-the introduction of Ted Kennedy-because the Treasury's chief economist felt lightheaded.

A small but telling oversight: the president had invited 137 important guests over to his house for the hours from just after midday until the midafternoon and no one seems to have considered the concept of food.

While Summers was holding forth, Krueger was half a block away, hunched over a Formica table in the bas.e.m.e.nt cafeteria of Treasury. He'd bypa.s.sed the special restaurant/lounge for senior staff because he was starving and in an acute rush: he had a pile of work before he was due to attend a 5:00 p.m. meeting of the National Economic Council. It was one he didn't want to miss.

The topic was "too big to fail," and Summers would be there. Krueger, Summers's ablest interpreter and, in some cases, opponent, made a point of never missing a meeting where he might sit with his old chum and onetime mentor. They were first together at Harvard for four years, when Summers was building his reputation on original research, rather than government service, and Krueger, six years his junior, was his star graduate student. After Krueger took his Harvard PhD and went on to become a professor at Princeton, the two remained close, corresponding regularly, seeing each other at every opportunity, playing tennis when possible, and sharing many mutual friends at the top of the economics profession.

As is the nature with old friends, Krueger's affection for Summers is not in spite of his friend's flaws but, rather, because of them, even if it is hard to appreciate the way Summers can frustrate a hard-nosed social scientist like Krueger. When he'd hear Summers doing his "disequalizing" riff-one of Larry's favorites-Krueger would think back to days, in the late eighties, when his friend was forming the view: "Larry felt that it didn't make sense that while he was being paid well by Harvard, some other professors were being paid in his ballpark. After all, he was Larry Summers, and who the h.e.l.l were the rest of them? He began to study structures, like unions, that compressed wage distinctions in ways that went against the market. Of course, some of those compressions are meant to soften the blow of such distinctions, mindful of a complex array of factors, many uneconomic, that go into who gets paid what. But that's part of the point. Larry believes that the goal is to make everything more brutally 'truthful'-in terms of the market being basically right in how it values people and trying to make it more so-and that process shouldn't be tampered with unless there is overwhelming, indisputable evidence that the market is not working. After a few decades, Larry has gotten very good at undercutting arguments for any government intervention into free markets.

"If you're the policymaker, you need to show overwhelming evidence that a market is not functioning, in a profound and disastrous way, to merit an intervention. The default is to go back to the first principle, of market efficiency, and to let matters mostly continue as they've been."